What is Provident Fund in Income Tax?, 4 Types of Provident Fund and Tax Treatment of Provident Fund

Introduction

There are various types of provident funds that can be used for investments and monthly savings by individuals. The functioning and taxability of these funds differ from one another. They’re also subject to separate sets of rules. In this article information on “What is Provident Fund in Income Tax?”, Types of Provident Fund, and Tax treatment of Provident Fund is mentioned.

A provident fund is a pension plan in which 12% of an employee’s basic income is withdrawn on a monthly basis to contribute to the employee’s future savings. This deduction is funded by a percentage contribution from both the employer and the employee.

What is Provident Fund in Income Tax?

A provident fund is a type of security fund to which employees contribute a portion of their income and to which the employer also contributes on their behalf. The exemption on the amount added to the provident fund is defined under sections 10(12) of the Income Tax Act.

The Provident Fund requires both the employer and the employee to contribute 12% of their PF income. The Employees’ Pension Scheme receives 8.33 percent of the employer’s contribution, while the Employees’ Pension Fund receives the remaining 3.67 percent. The employer’s payment to the Employees’ Deposit-Linked Insurance Scheme is 0.50 percent, and administrative fees are also 0.50 percent.

4 Types of Provident Fund

1. Recognized Provident Fund

All establishments with 20 or more employees are subject to the Provident Fund Act of 1952. The establishments covered by the scheme have the option of applying for the government-approved scheme or founding their own Provident Fund trust. The establishments can join the PF (Provident Fund) Act 1952, which is a recognized provident fund, which is a government-approved system. Alternatively, the employer and employee of the organization may form a trust to establish a provident fund scheme, with funds invested in accordance with the Provident Fund (PF) Act of 1952. Before it can be labeled as a recognized provident fund, the scheme must be approved by the commissioner of income tax.

2. PPF (Public Provident Fund)

For the general population, the government has established a provident fund. By creating a public provident fund account with an authorised bank, anyone can contribute to this scheme. Amounts ranging from INR 500 to INR 1,50,000 can be deposited. Following the completion of 15 years, the PPF (Public Provident Fund) corpus can be entirely withdrawn.

3. Statutory Provident Fund

The Provident Funds Act of 1925 established this plan. It is intended for government employees, accredited educational institutions, railways, universities, and other similar organizations. The General Provident Fund is another name for Statutory Provident Fund. The government adjusts the interest rates on General Provident Funds on a regular basis. Employees in the private sector are not covered by the General Provident Fund (GPF).

4. Unrecognized Provident Fund

If the commissioner of income tax does not approve the provident fund program established by the employer and employee (as described in Recognized Provident Fund), the scheme is considered unrecognized.

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Tax Treatment of Provident Fund

1. Tax on Recognized Provident Fund

When an employer’s contribution to a provident fund reaches 12 percent, it is taxed. The employee’s contribution to the provident fund is taxed.

Tax will be deducted if the rate of interest credited to the provident fund is greater than 9.5 percent. The retirement payment is tax-free if the following conditions are met:

• If the employer-provided 5 years or more of continuous service.

• If the employee was fired for a variety of reasons, including health concerns, the employer’s decision to stop doing business, and so forth.

• If an employee resigns and then returns to work for another company.

• If the employee’s complete credit balance is transferred to his or her account under a pension system under section 80CCD.

2. Tax on PPF (Public Provident Fund)

The contribution of an employer to a provident fund is taxed. The interest and retirement payments credited to the provident fund are tax-free.

3. Tax on Statutory Provident Fund

The employer’s contribution to the provident fund is tax-free, while the employee’s contribution is taxed. Tax-free interest and retirement payments are credited to the provident fund.

4. Tax on Unrecognised Provident Fund

Employer contributions to a provident fund are tax-deductible. Under the following circumstances, the retirement payment is taxable:

• Under the heading Salaries, payments received in respect of the employer’s contribution and interest are taxed.

• Payments received in exchange for interest on an employee’s contribution are taxable as income from other sources.

• Payments received in exchange for an employee’s contribution are not taxed.

Summary Table for PF Exemption

Conclusion

The government has established numerous types of provident funds to encourage employees to save for their social security. In many circumstances, the employer also contributes a specified proportion of the employee’s salary to these accounts. The full amount of the donation, plus interest, is credited to the employee’s account. He will be paid from this money when he retires, as well as on other significant events. The employee’s heirs will receive the entire sum if he dies.